These developments are eroding the effectiveness of a tax that was supposed to erase internal borders and convert India into one of the world’s biggest single markets.By Shruti Srivastava and Iain Marlow

Trucking firms like Caravan Roadways Ltd., which has more than 500 brightly-painted vehicles crisscrossing India, were meant to see immediate benefits from the biggest tax reform in India’s modern history.

But the chaotically-implemented goods and services tax is derailing the government’s revenue target and hasn’t much improved trade within Asia’s No. 3 economy. "Suspicious states" -- anxious to retain pre-GST earnings -- are stepping up vigilance at their borders, according to Crisil Ltd., and there’s little in the legislation to deter officials seeking bribes.

"The people who were earlier on the check posts, who were getting money, they are getting the same through other means," said Rakesh Kaul, a vice-president at Caravan Roadways. While some border posts were replaced by a system of supposedly-randomized checking, "right now, they’re not doing random checking, they’re checking every vehicle," he said.

These developments are eroding the effectiveness of a tax that was supposed to erase internal borders and convert India into one of the world’s biggest single markets. Although the GST is expected to widen India’s tax net over the medium-to-long-term, it has done short-term damage to the economy at a time when Prime Minister Narendra Modi needs to accelerate job creation.

Low RevenuesLaunched July 1, the GST -- despite numerous tweaks -- has been such a headache for small businesses that it has prevented many from filing returns, leading to lower revenues. Collections dipped to 808 billion rupees ($12.69 billion) in November from 833 billion rupees in October and 921 billion rupees in September.

Collections will get even worse, said two officials familiar with the issue. A substantial shortfall is expected in the budgetary target of 9.27 trillion rupees for indirect taxes, the officials said, asking not to be identified as they are not authorized to speak.

India’s 58 million small enterprises, which make up around 40 percent of the country’s GDP, are struggling with complex rules, a glitch-ridden IT backbone and onerous filing processes.

Problems with the compensation scheme has left smaller businesses wary of signing up. "Because of these conditions, the registered buyers and large companies are unwilling to take supplies from us," Gopal K Krishan, secretary general, All India Confederation of Small and Micro Industries Associations, said over phone in New Delhi. "We have cut down production."

The GST Council, headed by Finance Minister Arun Jaitley, has reviewed rates on more than 200 goods, simplified returns and introduced a fixed tax rate for small firms. However, "nothing much has changed for us except that now we are forced to compete with large players, who have a cost advantage" said Prakash Jain, chairman of a regional chamber of commerce in New Delhi.

Finance ministry spokesman D.S. Malik said: "Several steps have been taken to ease the problems of small and medium units."

Cross-Border TradeWhile observers predicted small firms would struggle, many also said GST would yield gains by easing onerous red tape at state borders and help make India resemble a single market for the first time. Trucks could travel faster, high logistics costs would drop and businesses would become more efficient. But companies and a new report suggest only modest gains. A Nov. 9 report from research firm Crisil, majority owned by S&P Global Inc., said trucks are only able to travel an additional 25 kilometers per day instead of an expected extra 100 kilometers.

Vineet Agarwal, managing director of Transport Corporation of India Ltd., said some routes have improved but that the situation is likely to get even worse when the government starts rolling out an "e-way bill" system for truckers in January.

"It’s a long way off to see the benefits translate into real economics," Agarwal said. "It’s a work in progress."